Redacted excerpt from ‘s forthcoming book, “Visual Arts and the Law: A Handbook for Professionals” with permission of the publisher Lund Humphries
Artist–dealer representation agreements are sometimes confused with simple consignment agreements. Each form creates different legal obligations. A consignment agreement ordinarily addresses particular works for a limited transaction (for example, a specific gallery exhibition), whereas an artist–dealer agreement usually includes general provisions that pertain to consigned works and a separate consignment agreement or rider identifying specific works. Thus, an artist–dealer representation agreement is more comprehensive than a simple consignment agreement, and tends to establish the terms and protocols of the business arrangement.
The Dealer’s Fiduciary Duty to the Artist
Whether the parties enter into a simple consignment agreement or an artist–dealer representation agreement, the arrangement involves the entrustment of works by the artist to the dealer, who acts as the artist’s legal agent. The law of agency governs this relationship. As the artist’s agent, the dealer is considered a fiduciary acting on behalf of the artist, who is the principal. Therefore, the dealer is required to act only in the interest of the artist and to forego all personal advantage aside from just compensation. The dealer also owes the artist a duty of loyalty and is obligated to avoid conflicts of interest.
Fiduciary relationships are common in the art market. By law, a fiduciary acts on behalf of the principal. Similar to the dealer, who acts as a fiduciary to an artist he represents, auction houses are fiduciaries to their consignors. Museum directors and trustees act as fiduciaries to their institutions.
Specifically, the law of agency, which governs the fiduciary relationship, requires the dealer to: (i) care for and manage the consigned property prudently; (ii) deal fairly and honestly; (iii) account periodically to the artist as to the dispositions of the property; and (iv) disclose all relevant information to the artist.
Typically, the artist retains title to the work while it is on consignment with the dealer. The work is considered trust property and the proceeds of the sale are considered trust funds belonging to the artist, and must be kept in a separate account. Dealers do not have discretion to use those proceeds for their own purposes, such as, for example, to pay a gallery’s operating expenses. Once a sale is consummated, the dealer will pay the artist an agreed-upon percentage of the sale price and keep the remainder as a commission. Depending on the nature of the agreement with the artist, a dealer may pay the artist advances against future sales.
The dealer’s legal status as fiduciary means that he may not avail himself of any advantage at the expense of the artist, or engage in selfdealing, such as purchasing the artwork for himself, without the consent of the artist. For example, if a dealer purchases a work outright from an artist, without disclosing that he had previously agreed to resell the work to a third-party, the dealer would be in breach of his fiduciary duty and could be liable to the artist for damages resulting from that breach. In contrast, if the dealer is not the artist’s agent and buys work outright from the artist, there is no fiduciary relationship, and hence no breach. However, a dealer who knowingly defrauds an artist could be held criminally liable.
The majority of states in the US, as well as the District of Columbia, have passed legislation applicable to the consignment of artworks to dealers by artists, their heirs, and their personal representatives. New York was the first state to enact an art consignment statute, the New York Arts and Cultural Affairs Law (NYACAL), in 1966. In 1975, California followed, using New York’s statute as a model. The purpose behind these laws is to protect artists from the misappropriation of consigned property or sales proceeds. In addition, the law shields artists from unscrupulous dealers who attempt to abdicate their fiduciary responsibilities to the artist by using contractual waivers and disguised purchase agreements that render the relationship one of debtor and creditor. Since criminal intent is difficult to prove, most artists resort to civil proceedings. These statutes apply only to artists who consign their works to dealers, not to collector-consignors in the secondary (resale) market.
These consignment laws impose upon dealers the highest level of fiduciary care under a trusteeship established by operation of law, which covers the artwork and sometimes the sales proceeds held by the dealer in trust for the artist. Thus, a dealer may be strictly liable (that is, regardless of negligence or intent to harm) based on an absolute duty owed to the artist, whether the dealer purchased works outright or sold the works. In either scenario, the dealer does not have the right to his commission until the artist is paid in full for the agreed-upon percentage of the sale. Some states allow the artist to waive such provisions in writing—for example, by permitting installment payments to be divided equally between the dealer and artist. New York permits a limited waiver, excluding the first $2,500 of proceeds received in any 12-month period, starting with the date of the waiver. Other states, such as California, nullify any attempt at a waiver. Therefore, prudent practice dictates that a dealer segregate the artist’s share of the sales proceeds and create a trust account separate from the dealer’s operating account. In 2012, New York Governor Andrew M. Cuomo signed into law a long-awaited amendment to the NYACAL. The amendments sought to strengthen the existing trust property and trust fund provisions of Articles 11 and 12 of the NYACAL and prevent unintended interpretations from interfering with the purpose of these Articles. Effective November 6, 2012, the consignee art merchant became subject to significant new duties and liabilities. Galleries that disregard their obligations under the statute may now be criminally sanctioned, and may be required to pay attorneys’ fees to artists in civil suits.
Undoubtedly, the most critical aspect of the amended statute is that it explicitly states that the artwork and proceeds are considered property held in a statutory trust and are not, and will not become, the property of the art merchant or the art merchant’s bankruptcy estate. The amended statute also includes a provision specifying that the trust property and trust funds shall not be subordinated to any claim, lien (that is, a legal right or interest a creditor may have in the property), or security interest “of the consignee’s creditors.”
Accordingly, if the gallery consignee is insolvent and sells an artist’s work, neither the gallery nor the gallery’s creditors can legally touch the artist’s share of sales proceeds, which are held in a trust for the artist. Both the consigned artwork and proceeds held in the trust are beyond the reach of the gallery and the gallery’s creditors. New York’s amended artist consignment protects artists by making it difficult to waive their rights under the statute prospectively, and fortifies the law’s provisions on trust property by including civil enforcement and criminal penalty provisions. Furthermore, the amendments clarify the dealer’s fiduciary obligations to the artist and increase the artist’s awareness of her rights. Finally, the amended statute’s Section 3 further specifies that an artist may seek injunctive relief, recover actual damages and reasonable attorneys’ fees if the artist is successful in an action against the gallery for breach of fiduciary duty.
© Judith Prowda 2013